As the prospect of your company’s IPO becomes more real, you have many decisions to make about how to invest your newfound wealth. ESG investing can help you pay your good fortune forward by supporting businesses that are making positive change in the world. Done right, ESG investing makes important impacts while also building financial security for investors.
What Does ESG Mean?
ESG stands for environmental, social, and governance criteria that are applied to financial products.
Environmental criteria deal with stewardship of the natural world. Investing with an environmental lens means prioritizing investments in companies that protect the Earth and preserve its natural resources.
Social criteria examine how the company relates to its employees, other investors, and the community at large. For example, if you want to promote gender equity, you may consciously avoid investing in companies that have had reports of gender pay disparities.
Governance deals with how a company is run. In considering governance criteria, you may look at factors such as diversity in the company’s board membership, transparency of accounting practices, and what (if any) political donations the company makes.
In the US, the ESG designation is still largely unregulated, but the SEC is working on providing greater oversight of the ESG market.
Principles of Socially Conscious Investing
ESG investment priorities can vary widely from person to person, but investments that are marketed as ESG products should meet certain standards. As a potential investor, having some guidelines for evaluating purported ESG investments can help you identify those that best uphold the values you wish to promote. Here are a few core principles to help you select reputable ESG products.
You should be able to know exactly how your investments are working for the change you want to see. Any investment marketed as ESG should clearly outline how it upholds the values it advertises. A fund that is marketed as an ESG product should state what particular ESG metrics it monitors and what benchmarks it applies.
The data surrounding ESG initiatives should be easily accessible so you can determine to what extent your investments are meeting their ESG benchmarks. If anecdotal and empirical evidence are not telling the same story, this may be a red flag that your investment isn’t as sustainable as you may have been led to believe. A reputable investment firm will perform due diligence to validate companies’ ESG claims; this includes third-party ESG rating systems. Model validation and data governance are key.
ESG investments should perform well in addition to promoting the greater good. Consistent and accessible performance reporting and pre-contractual disclosure are essential. Performance reporting should document how the fund is doing, including any quantitative objectives that have been established. You should also be able to examine both the quantitative and qualitative impacts of your investment.
Why Is ESG Investing Important?
ESG is important because it gives individual investors more power to fuel the change they want to see in the world. Whether you want to lift up members of minority groups, protect the environment, or simply grow your investment, an ESG investment strategy can help achieve your goals.
ESG investing isn’t charity; it’s a smart financial strategy. The best companies deliver value not just to company owners and shareholders but also to other important stakeholders, the community at large, and the environment. A trusted fiduciary investment advisor can help you define your investment goals and identify strategies that align with both your financial objectives and your values.
ESG initiatives can be complex to implement in your investment strategy due to the subjective nature of the topic. Simply put, everybody has different priorities in life; ESG can mean different things to different people. Most firms provide general ESG funds and it’s up to you to pick whichever is closest to what you’re looking for. A unique capability that WRP provides is a customized ESG investment approach directly tailored to your goals and priorities. Whether it's implementing negative screens, like avoiding certain companies or industries that don’t align with your principles, or positive screens like investing in companies that promote board diversity or animal welfare, WRP is well-equipped to work with you to build a personalized ESG approach that perfectly aligns with your values.